Agilent Technologies, Inc.

Good day, ladies and gentlemen, and welcome to the Agilent Technology second quarter 2019 earnings conference call. At this time all participants are in a listen-only mode, so if anyone should require assistance during the call, please press star then zero on your touchtone telephone to reach an operator. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Oprah Dingroff, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Liz, and welcome everyone to Agilent's second quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Tyson, President of Agilent's Life Science and Applied Markets Group, Sam Raha, President of Agilent's Diagnostics and Genomics Group, and Mark Doak, President of the Agilent CrossLab Group. You can find the press release, investor presentation, and information to supplement today's discussion on our website at .agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I would like to turn the call over to Mike.

Thanks, Ankur, and thanks for joining our call today. Our Q2 results are mixed. On one hand, we continue to deliver strong growth in two of our three businesses. On the other hand, our LSAG business is experiencing unexpectedly soft market conditions. Despite revenue below our expectations, the Agilent team delivered solid earnings with EPS of 71 cents at the midpoint of our guidance. This represents 9% EPS growth over last year. We also delivered a 17th consecutive quarter of adjusted operating margin expansion. For the quarter, total revenues were $1.24 billion, representing 4% of core growth. Let me break that down. Performance was led by our Agilent cross-labs group with core growth of 9%. Our Diagnostics and Genomics group delivered 6% growth, while our LSAG business declined 1%. There were two key market factors observed in the latter part of the quarter that contributed to the LSAG revenue shortfall. First, we're experiencing slowing of instrument orders in China. The second factor is tied to more general slowdown in orders from Big Pharma. I point out that this slowdown became apparent to us at the beginning of April. Let me explain this in a little more detail. In China, our overall business grew 3%, driven by double-digit growth in ACG. However, our LSAG business declined by 1% during the quarter. There are two major factors impacting our China LSAG business. First, the recovery in the food market has not yet materialized. Government labs have not yet resumed purchasing at the levels we had previously seen. Second, the Chinese government's -plus-7 initiative to lower generic drug prices is having a greater than expected impact on small molecule pharma. Consequently, we're lowering our revenue expectations in China this year. China does, however, remain an important long-term growth market for us. The other factor affecting LSAG growth is moderating global demand in small molecule pharma. We've seen several large accounts delay in replacement purchases. In contrast to small molecule pharma, we continue to see strong global biopharma demand. While overall growth declined 1%, there are positive signs in other LSAG end markets. Demand remains strong in the environmental forensics and biopharma markets, with solid results in chemical and energy. You'll recall we strengthened our leadership in gas chromatography with the recent launch of the new 8860-8890 GCs. Since the launch, we're very pleased with the stronger than expected customer demand we've seen. We also have some other very exciting new products. In April, we introduced the new Agilent 6546 LC-MS QTOP system. This system is tailored to environmental, metabolomics research, and food testing laboratories, providing the ability to acquire high resolution data across an unprecedented dynamic range. Customers can simply see more compounds and analyze them more quickly with this new offering. In addition, during the quarter, we also introduced a unified, purpose-built portfolio of cell analysis products targeting cancer immunotherapy with the addition of a CEO of bioscience. This offering enables research in this fast-growing segment. Our cell analysis business continues to deliver double-digit growth. While we're facing soft market demand in our LSAG business, we remain confident in the strength of our portfolio and believe we are well positioned to continue winning in the market. Now, I'd like to share more detail about the other two businesses. The Agilent cross-site group continues to deliver excellent results, growing 9% on a core basis. Demand is broad-based across all regions. This reflects the market-leading value of our portfolio and differentiated customer experience. In China, the ACG business grew in the mid-teens. The team continues to execute a strategy of leveraging Agilent's large instrument install base. We also continue to expand our services footprint in emerging cities and tailor our consumers' portfolio to the local market. The Diagnostics and Genomics group delivered a solid core of a 6% core revenue growth. Regional demand is led by strength in the Americas. Our pathology-related businesses grew high single digits. Previously announced large competitive wins, along with continued strong demand for our antibodies, and our companion diagnostic services are driving our growth in that segment. Agilent also received expanded FDA approval for our -1-IHC companion diagnostic for metastatic non-small cell lung cancer. This companion diagnostic will now be used to identify a broader range of patients who may qualify for first-line treatment with KTRUDA. The NAFTA business continues to deliver strong performance with mid-teens growth. We are on track to bring our second facility online. We anticipate the initial production of GMP-grade APIs by the end of fiscal 2019. Material revenue contributions are expected in fiscal year 2020. Looking ahead to the second half of the year, we are confident that the momentum beat will continue in our ICG and DGG businesses. For our LSAG business, our outlook for the second half is tempered by our view of continued soft market conditions. As a result, we are revising our outlook for the full year, reaffirming our prior EPS commitment while lowering revenue growth. I will describe this in more detail, but first just a few summary comments. We now expect to live a core growth of year between 4 and 5%. While we are facing market headwinds in our LSAG business, our full year earnings guidance remains intact. The Agilent team remains firmly committed to meeting our current guidance for earnings growth. Our guidance reflects confidence in the strength of the overall Agilent business model and our ability to drive solid earnings results. Thank you for being on the call today and look forward to answering your questions. And now I hand off the call to Bob. Bob?

Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional detail on revenue, walk through the second quarter income statement, and some other key financial metrics. And then I'll finish up with our updated guidance for Q3 in the full year. And let's otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a -over-year basis. As Mike mentioned, we delivered solid Q2 earnings despite slower than anticipated top-line growth, underscoring the strength of Agilent's financial model and our ability to respond quickly to changing market conditions. Revenue for the quarter was $1.24 billion, with core revenue growth of 4%. Reported growth was 3% as currency negatively impacted growth by 320 basis points, slightly higher than expected. This was partially offset by M&A contributing 190 basis points of growth. As Mike spoke to the business group's performance for the quarter, I'll provide some additional details around our end markets and regional performance. Pharma, our largest end market, delivered 2% core growth. We continue to see strength in BioPharma and aftermarket services and consumables and in our NASD business. However, the slowing of the instrument replacement cycle for small molecule applications led to a softer than expected result. Chemical and energy core growth was a strong 6% above expectations and driven by strong low teens growth in services and consumables. All reasons grew, led by strength in the Americas. Environmental and forensics was up 7%. Strength in forensics is linked to the ongoing global opioid crisis, which is driving demand for expanded forensic laboratory capabilities, more samples and broader screening requirements. The environmental market grew mid-single digits and continues to be driven by an ongoing expansion of testing and oversight in China. Now wrapping up our end market discussion, core revenue for both diagnostics and clinical and academia and government both grew 5%, while food declined 3% due to the softness in the China market. Geographically, we saw growth in all regions, led by the Americas with 6% growth as conditions in the US continue to be healthy. Europe with 4% growth performed better than anticipated, driven by pharma outsourcing trends and continued strong BioPharma investments. China grew 3% and while we had strong mid-teens growth in the ACG business, softer instrument sales in the food market and small molecule pharma led to lower than expected overall results. Now before I leave revenue, the core growth of our combined LSAG and ACG businesses, while below our expectations, was 4% in the quarter and we believe compares favorably to the overall analytical lab market growth. Now turning to the rest of the P&L, Q2 growth margin was 56% and increased 70 basis points compared to the prior year. We continued to achieve good gross margin improvements through our productivity initiatives and driving continued economies of scale in our ACG services business. Operating margin was 21.9%, up 60 basis points, mainly due to disciplined cost management as shifting market conditions became increasingly apparent in the latter part of the quarter. Additionally, the tax rate was down marginally and average diluted shares were 321 million. This led to non-GAAP earnings per share of 71 cents in the second quarter, an increase of 9% compared to the prior year and at the midpoint of our guidance. Now before moving to Q3 guidance and full year guidance, I want to touch on a few additional financial metrics on cash flow and on the balance sheet. Our free cash flow for the quarter was $213 million. We deployed $102 million in the quarter, consisting of $52 million in dividends and $50 million in share repurchases representing roughly 635,000 shares. Lastly, we ended the quarter with $2.2 billion in cash and $1.8 billion in debt and during the quarter, we also renewed our revolving credit line of $1 billion, which remains undrawn. With our strong balance sheet position, we will be more active in the second half of the year deploying capital. Specifically, we intend to deploy $500 million for share repurchases with the majority of that to come in the third quarter. This underscores not only our balance sheet strength, but also our confidence in the future. In addition, we still have plenty of capacity for M&A and we have an active business development funnel, although we will continue to remain disciplined in our approach. Now let's turn to our non-GAAP financial guidance for the fiscal year. As Mike indicated, we're reducing our core revenue growth outlook for the year. While our expectations for ACG and DGG aren't changing, our forecast for the second half is tempered by softening market conditions in certain segments on the instrument side of the business. The developments in China, coupled with the continued uncertainty on trade, is creating a more challenging macro environment. As a result, we are updating our full year revenue guidance to a range of $5.085 to $5.125 billion, representing .5% to .3% reported growth. Currency is expected to be a headwind of 210 basis points partially offset by M&A, and as a result, we're now expecting core revenue growth in the range of roughly 4% to 5%. Now despite reducing revenue guidance, we feel confident in holding to our full year earnings per share guidance range of $3.03 to $3.07, representing growth excluding currency of roughly 10% to 11% and reported growth of .6% to 10%. As Mike mentioned, our EPS guidance reflects confidence in the strength of Agilent's business and our ability to drive earnings through multiple levers. These include disciplined expense management and the use of our balance sheet. Based on deploying the additional $500 million towards share repurchase, we're updating our average diluted share count down to $319 million for the year. Now finally turning to the third quarter, we're expecting revenue in the range of $1.225 to $1.245 billion, representing reported growth of .8% to .5% and core growth of .7% to 4.1%. Currency is estimated to be a headwind of 210 basis points partially offset by M&A, contributing roughly 120 to 150 basis points of growth. Third quarter 2019 non-GAAP earnings are expected to be in the range of 71 to 73 cents a share, which is 6 to 9% reported growth versus a year ago. The share count for Q3 is expected to be $317 million. Let me conclude by saying we are pleased with the team's ability to preserve earnings performance despite shifting market conditions. We are confident in the strength of Agilent's business and our ability to navigate softness in certain markets. With that, before opening it up for questions, I will turn it back to Mike for some closing comments.

Thanks Bob. I just want to add a few closing words before we move into Q&A. You know, great companies do not just react to market conditions, they see market opportunity. At Agilent, we will continue to drive productivity and double down our efforts to be a more agile company. We have multiple leverage to drive earnings including discipline, expense management, and use of our balance sheet. However, we are not going to expense cut our way to growth. We will continue to bring innovative new products to market and aggressively compete for market share. Now, Ankur, back to you for the Q&A.

Thank you Mike. Liz, if you can please provide instructions for the Q&A.

Ladies and gentlemen, if you would like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again, that's star, then one, if you would like to ask a question at this time. Our first question comes from the line of Dan Leonard with Deutsche Bank. The line is now open.

Thank you. So first question, trying to make sure I understand the issues in small molecule pharma. Is that an LC comment specifically or more broadly customers you're labeling as small molecule pharma? Can you comment on the trends between ethical pharma and in generics?

Yes, so I'll make a few comments and then Jacob, feel free to jump on this. I think it's primarily LC related and it's a situation we're seeing actually globally. I call out specifically the government initiative in China. We also saw a large pharma accounts in US and Europe. This delays in purchasing. In fact, I remember talking with our European field manager. We had an order that was supposed to close in January, a big European pharma company was pushed out. We thought it was going to close at the end of March and now it just closed in May. And perhaps you can add your thoughts here as well,

Jacob. You're absolutely right, Mike. That is primarily the LC business. However, many of those pharma companies also have investment into some other areas. And when they now see some challenges in the generics, they might pull back also in other areas. So LC is the prime focus, but it certainly also expands into the mass spec and other areas.

And I think just to close this off, Dan, I think the comments for China were specific to generics. I think globally we saw both an ethical and generic drugs in the small molecule side.

Okay. Thank you. And then Mike, my follow up. Can you elaborate a bit further on the actions you're taking to respond to the market softness? And I ask because the decremental margins in LSAD were pretty high. So can you elaborate a bit on what you're doing to react? Thank you.

Yes. So as Bob mentioned in his call notes, we're actually quite pleased by the action team to really rapidly adjust the cost structure in a phenomena developed probably over the last few months. That's four to six weeks of the quarter. And the actions are just double downing on the Agile Agilement programs that we had already in flight. But also really making sure that we looked at the expenses that weren't directly related to growth. And really it was a call to action to kind of pull back on things that really don't drive growth, like internal travel, for example. So we pulled all the levers we could, but while maintaining intact our coverage model in the field as well as our NPI programs. I don't know if you have anything else. Yeah, I

would just add, Dan, you know, while the LSAD business did show a decline year over year, I would remind you to look at the total company, which actually did improve margins for year over year and for the 17%. So we operate this as a full company as part of the One Agilent approach. And so we're taking a number of initiatives. But as Mike said, we're also doubling down on areas such as the new products in the areas where we think we can drive. You know, we did see pockets of strength in LSAG and Jacob and team are really focusing on those areas, areas such as cell analysis and chemical and energy and some of the other areas as well. So it's not just an expense. It is really ensuring that we're focused on the areas that we have the fastest opportunities for growth.

Thank you for all that,

Keller. Sure.

Our next question comes from the line of Tycho Peterson with JP Morgan. Your line is now open.

Okay, thanks. I'm going to follow up on some of the pharma questions. You know, one night when we did the CEO call back in early April, you did call out the, you know, China generic headwinds. We didn't really hear about the pharma delays at that point. So obviously it seems like it came up later in the quarter and you mentioned it was several accounts. So can you maybe just talk on how widespread it is? And, you know, is this a transitory issue in your mind or how are you thinking about pharma for the remainder?

Yeah, thanks for the excellent question, Tycho. And I do recall our conversation, I think it was in early April and I just come back from China. And we were first hearing about the 4x7 initiative in China. And, you know, to your question, I think that we saw it a fairly broad base. This is outside of China. So I think China's got some specific things happening relative to the government actions around 4x4 plus 7, which I think are fairly publicized. But we saw in both our US and European customers. And we have a, we just had a major account review and all of our major accounts were down year over year. And there are just a level of caution relative to replacing investments in the small molecules side of the businesses. These same companies, however, are investing quite heavily in the biopharma side. So it's sort of a tale of two cities from the standpoint of what's really going well inside some of our larger accounts versus where there's been a pause. And Bob, I know you've looked at this quite closely as well. I don't know if you had anything else to add to that.

No, I think you're right, Mike. You know, and Tycho, as we're thinking about the guidance going forward in the second half of the year, we are looking at probably a more moderated growth for pharma going forward. But still not at the rate that we saw in Q2, but probably in the mid single digits where we were expecting probably high single digits globally. So I think we're taking a prudent approach there as we're thinking about the outlook for the year. I do say, I would say that we're continuing to, you know, as Mike said, you know, grow our biopharma business. But, you know, we still have the proportion, a large proportion of our pharma business being in the small molecule side.

I

was just going to add, Tycho, one thing we have seen, though, is on the small molecule side, there still is very high demand for chemistry and services. I think you've seen that reflected in the strong ACG results.

And it was a little surprising to see food down now that you've anniversaryed it. Can you maybe just, I know it's not recovering, but is it getting worse?

Yeah, thanks. Tycho was a surprise to us as well. It's not getting any worse. It's just not getting any better. And, you know, we had anticipated coming on the anniversary that the central government would start reinvesting at the previous level and the spends just are not there. Now we are seeing other parts of the end market. So the spends and investments in environmental are quite strong, but they've not yet returned to the spending levels that we had seen prior in the food market. But again, I would say the same story here relative to the aftermarket flows. We are still seeing strong growth on the aftermarket flows in food. It's just the instrument purchases aren't there. So it's not getting any worse, but it's not getting better as we had thought.

All right. And then one last clarification on the cost side. Are you taking any additional tariff remediation efforts, you know, given round three?

Yeah, why don't you take that?

Yeah, you know, we continue to, you know, be focused on additional remediation to minimize that. The increase between the round three from the 10% up to the 25 is incorporated into our guidance. It was a, I've talked about this before, it's roughly, you know, about $750 to a million dollars in the second half of the year net of the efforts that we're taking.

Okay,

thank

you.

Our next question comes from the line of Patrick Donnelly with Goldman Sachs. Your line is now open.

Great, thanks. Mike, maybe a second clarity. How are you? Just some clarity around, you know, some of the slowing you saw beginning in April. You know, I know last call you kind of talked about January being slow. So maybe just talk us through the cadence of the quarter, particularly in China, you know, where February and March trending okay, and then you kind of got the signs of four plus seven and April really slow because again, you know, one of your peers who didn't have April in their quarter had had some real softness there, which obviously was in March. So maybe just talk us through kind of month by month how things trended there.

Yeah, sure, Patrick, because we really want to make sure it's clear to the investment community what we saw during the quarter. So what I would say is if you had been if we've been having this discussion at the end of February, we were feeling really good about the quarter. In fact, we got off to a very good start. And as we looked at our forecast for the rain of quarter looked pretty solid. But as we increasingly went through the month of March, we were expecting in the last seven to ten days our normal push of orders to close business. And I think normal push is across all the regions because often we have a lot of customers who have quarter end dates. So typically March is a pretty strong month for us. And when we closed the last week or so of the orders in March, it just wasn't there. We just didn't get the normal month end surge. And then, you know, perhaps maybe some orders didn't get booked at the end of March. We didn't see anything unusual in the beginning of April. So I think it was at that time frame that we knew we were in the midst of something that we hadn't expected. I would say, you know, again, I think it caught our teens by surprise. I had been in China at the latter part of March and we just reviewed the forecast and then we could we could see that they were caught unexpectedly by customer delays in China. We also saw the same thing in Europe and the US as well.

Okay, that's really helpful color. If I

could just add one more thing, what I would tell you is and just to kind of reinforce the confidence we have in regards to the second half outlook, April did come in relative to our expectations on orders, a recast order on the LSAG fund, obviously too late for revenue. But that gives us confidence that we have a handle on where the market is right now.

So the orders trended a little better and kind of late April.

We came in relative to our forecast. But again, we're still saying that it's going to be subdued for the second half. We really wanted to kind of it's not a situation where we see a continuing worsening of the end market environment. We'll be also not seeing a dramatic improvement either. But we do believe we've gotten a level of predictability back in the business based on what we saw in April.

Honestly, that's helpful Mike. And then maybe just one kind of housekeeping item. Can you just help us frame how much of your business is small molecule? You know, I know 30% is kind of under that biofarm umbrella, but maybe just help us think about how much is specific to this. Yeah, great

question. In fact, Bob and I were just talking about this right before the start of this call. And I think right now we characterize as 80-20, which is about 80% of the small molecule, was about 85% two or three years ago. We think there will be a shift to more biofarmers naturally in 2020 given just the continued strong growth we're having with today's portfolio. But back to my comments on NASD, once that additional revenue flows, you'll see the benefits of our broader biofarm play that Ashwin has. But right now I characterize about 20% of our 20% of the 30% is in biofarmers.

Okay, thank you very much.

Our next question comes from the line of Ross Mookin with Evercore ISI. Your line is now open.

Good afternoon, guys. So a lot of helpful color, but I guess just going back to China, I mean, how much did you debate, you know, sort of what to do with the assumption there, even though April came in, it seems like, or at least overall for the book, kind of in line. You know, obviously, the last couple days have been, you know, quite a lot just in terms of some of the trade tensions and the uncertainty. You know, it's possible some of the four plus seven pieces kind of get worse just in terms of China's restrictions. I guess, how confident are you that you sort of titrated this correctly, not just for kind of what you saw in April, but sort of the current macro relative to sort of the last week or so where obviously we had a uncertainty just going out from our trade?

Hey, Ross, great question. I almost feel like you may have been inside the halls here at the Agilent offices. So this was a big point of discussion with the team and, you know, where we landed was, you know, our team had brought down their forecast in China relative to where we were before. And what we said, we're going to take a very conservative view. We're going to assume that the strain on the overall farmer market continues in China as well as food, there is no recovery. So basically, we're assuming, you know, that the softness that we had experienced already through much of the back half of the quarter will continue in the second half. So I think we've tried to be prudent relative to taking a very conservative and bringing our forecast down. And as you know, we had a high single digit kind of forecast for the full year for China, but I think we're probably around 3% for the whole year. Again, I would keep, I would remind the group too that a lot of the call is focused on LSAG, which has really been the center of our weakness for the court on the top line. But one of the reasons why we have confidence in the overall growth forecast for China is that we have very predictable results coming through on the ACG side, which was mid-teens growth. And I think it's been fairly well publicized. We're under-penetrated on DGG. So we have expectations of good solid growth in both of those businesses. So it's kind of a tale of two cities. We expected the continued strength on the ACG and DGG side in China while bringing down our expectations on the LSAG side. And Bob, I know we have a lot of debate on this one. So maybe you have something else you'd like to add there?

Yeah, yeah. Thanks, Mike. And Ross, maybe to put some dimensions to that. When we think about how we've taken our guidance down for the second half of the year, really about two-thirds to 70% of that reduction is really reflective of China. And the other third, call it 10 to 15 million dollars, is probably the broader pharma. So the majority of it is the lower expectations or tempered expectations in the China market.

And maybe ACG margins were pretty impressive. The pull-through there continues to be north of, I don't know, 50%. I guess what's driving the massive step up in that business this year? Because the expansion, even relative to what you saw in the first quarter, kind of accelerated. And so trying to get a feel for kind of the underlying.

Yeah, so Ross, I'm glad you noticed that because we really were quite pleased with the overall margin performance in ACG. And I think I made the comment inside the conversation, listen, we've proven that we can scale a service business and make good margins. What I'd like to do is maybe turn the call over to Mark Doak and let him take a little bit bow here with the audience and maybe share, Mark, what specifically has been going on within your team.

Thanks, Mike. And on the margins front, obviously, we've seen a nice expansion through the first half along that. Come back to a couple things I think Mike and Bob has alluded to. First of all, in the Agile Agilent programs, many of these are shared services across the company, which certainly help the broader gross margins for the business. But inside of the business, particularly services, there's been two major themes. One is we've used advanced analytics to really look at how we can improve various aspects of our operations and use these analytics pretty widely over the course of the last year to help drive that. And then a second component of that, I've talked many times about our drive to put our business online and use things like mobile apps that fundamentally facilitate faster and more complete workflows for our team on the ground. So you put all those pieces together, it's turned up to be actually a quite positive development. But this is after a lot of years of investment to really build a platform across our services business that's scalable.

Thanks, Mark. Thanks, Rob.

Our next question comes from the line of Doug Schenkel with Cowen. Your line is now open.

Hey, good afternoon, guys. Good afternoon, Doug. So I'm going to have a couple more questions on Pharma in a second, but I actually want to start on DGG. If topology grew high single digits and NASD grew mid-teens, it would seem hard for DGG to only grow .3% core, given those businesses account for about 60% of DGG sales unless you had some weakness in genomics. How did genomics go in the quarter and how are competitive dynamics evolving in Target and Richmond? Or maybe I'm just off course here and if so, maybe you can point me in the right direction.

I don't know the exact map. I had about 6% overall for the DGG. But I think the answer would be genomics business came in exactly as we had forecasted overall. Clearly, there's some competitive wins out there on the Target and Richmond side, but the main challenges that we've seen have been more on our legacy genomics. And Sam, anything you might want to comment on there?

No, Mike, I mean, I think you said it right. There are puts and takes in any business. I mean, overall, we performed as we expected. We had some, we're continuing to see some really good strength related to our QC part of the portfolio. And yeah, so really nothing more to

add. Yeah, and the reason why I mentioned we have a non-NGS part of genomics because our NGS side, which is inclusive of Target and Richmond, was close to double digits. So it's been more of some of the older products.

Okay. All right. That is helpful. Thank you for that. So on LSAG, it looks to us like LSAG would have to decline to get to the midpoint of fiscal Q3 guidance. You know, we get to the high end with it actually flat year over year, and that's not changing our DGG or ACG assumptions, which we don't think we're being too aggressive there, you know, and basically being consistent with what you guys have been talking about all year. So are you assuming LSAG core growth declines in the third quarter? And if so, how do we reconcile that with your comment on instrument orders improving in April? Does that tell us something about May order trends or is this just conservatism coming off of a weaker than expected quarter?

Yeah, I think this is Bob, Doug. You know, as we think about the various pieces, obviously there's some variation there, but we're assuming roughly flat for LSAG in Q3. Hopefully that proves to be conservative. But, you know, given that we saw this late in the quarter, I think we're taking a prudent approach for Q3. As Mike said, you know, our April orders hit our revised forecast, but that's also one month. So, you know, hopefully it proves to be conservative, but I think it's the appropriate level of forecast right now.

And I think, Bob, the way that Doug's thinking about the modeling of ACG and DGG matches how we've been thinking about as well.

That's right. That's right. We expect them, you know, they continue to perform as expected and we would continue to see the growth rates that they've experienced in the first half be similar in the second half of the year.

Okay. And last one, the slowdown in small molecule demand is something you've been talking about for a while. Clearly things were and are worse than you expected. So I think all that's clear, but I want to make sure on the large molecule side that growth met your expectations.

Yeah, absolutely. Yeah. So that's like I said earlier, it's a tale of two cities. The biopharma continues to do quite well, both on the instrumentation side, but also we've been investing very heavily on the chemistry side, inclusive of one of our recent acquisitions, Prozine, was really targeted in the biopharma side. And then also we have the NASD story as well. So the biopharma is right where we thought it would be.

Yeah, Doug, I would say, you know, the other thing is, I know we're talking a lot about pharma and certainly it didn't meet our expectations. I would say the biggest variable in the quarter though was food because we were expecting the anniversary of the reorganization and to have a much better performance and it was still down. Yeah.

Okay. Thank you very much for all that color.

Sure.

Our next question comes from the line of Derek De Bruyne with Bank of America. Your line is now open.

Hi. Good afternoon. Good afternoon, Derek. So sort of following up on the food question, just looking at this, obviously your water has some issues as well. I mean, is it, did some business just go to Shimazu or some business go to Dionics or some of the other companies that are sort of out there? I mean, can you just sort of talk about that it's not just business shifting around, you know, rather than things not coming back? Yeah, sure. Happy to

do so, Derek. In fact, I think it was almost a year ago in my Q2 18 call that we first started talking about the reorganization of the whole food safety and structure in China. And we're really confident the business isn't going anywhere else. It's just not there. And when I talk about the business, think about along two dynamics. One, which is the business that's been shifted to contract testing labs, which were well positioned. And what we're focusing on is the central agencies where Agilent has historically had a very strong position. They are just not investing right now beyond supporting the ongoing operations with chemistries and services. So we're quite confident that the business isn't going anywhere else. It's just not there.

And did you, I mean, I think we were all surprised by the strengths in the first fiscal quarter. I mean, did you, some of the weaknesses potentially, as you saw, there was some stockpiling you didn't see happening in Q1. Yeah.

No, no, no. In fact, I think the, like I said earlier, we were sitting here at the end of February thinking that the quarter, this quarter wasn't developed just as it was. And what we didn't anticipate was just how quickly the pharma business slowed down in China, and then as well as the lack of recovery in China on the food side. And then there was a split, there seemed to be this whole small molecule side in US and Europe. So really it was a tail of the latter part of the quarter. And we saw nothing unusual about our, we can't point anything unusual relative to our Q1 results.

And the US and European pharma slowdown, was this just capital not being, I mean, I know there's always a little bit of slowness in the release of capital funds at the beginning of the year. Is it that or just people, you mentioned some order delays. And I guess, is that because the companies are just nervous on their small molecule businesses? I mean, are they, I mean, once again, you know, so we're going to ask the question, are they back to extending the life on their current instruments or, you know, going along those lines and just trying to figure out what's driving that?

Yeah, I think it's a little of both, Derek. I mean, I do think that they're, you know, we haven't seen, you know, we obviously have a backlog and so forth. We haven't seen orders being canceled or people saying they're not purchasing. It's actually being delayed. And so the question for us was, is it transitory and we'll catch up. We're taking the approach that is probably not going to catch up and it's just going to continue to push. But I also do think that there's probably some element of, you know, trying to get more mileage, so to speak, out of the existing instrumentation, particularly as they're looking at capacity.

And Bob, I think it's very clear out there that we see that there is certainly a conservative procurement tactics happening right now and people are starting a little bit. But at the same time, we actually see that our funnel is quite rich. So we still see a lot of business, but it goes much slower these days. So we actually, we do believe there's a greater opportunity out there, but we can't call it right now. Great.

Thank you.

Thanks, Derek.

Our next question comes from a line of Brandon Collard with Jeffreese. Your line is now open.

Thanks. Good afternoon. Good afternoon, Brandon. Mike, I'd like to step back a little bit. I realize it's early, but could you speak to the, as we look at fiscal 20, could you sort of speak to the relevancy of the 4.5 to 6% midterm range that you talked about at the June analyst day last year, relative to the 4 to 4.5 you're going to put up this year and what specifically needs to get better to achieve that?

Yeah, I think it's probably a little early to talk about 2020, but, you know, there's really an ending developing that we can see the takes away from our long-term view of the ability to grow this company. And we've got, as I mentioned in my opening comments, we had two or three businesses are performing very well. And we have some incremental stuff that's going to be coming in those businesses in 2020. And then the, I think what we need to see is really focused on the soft points that we saw in the LSAG business, which is a return to positive growth, a higher level of growth in China, which I called out in my remarks, we're saying, listen, you know, the quarter obviously did not develop as we had forecasted, but we believe that, you know, as things, eventually things will get settled down, issues will get resolved, and we'll get clarity on even the generics, which are currently under a lot of pressure. When that industry gets through that knot and the survivors are going to be in a reinvestment mode and who need to drive productivity, we think there's going to be business there. So I think that part of the story for 2020 is a return to an improved China market environment. Jacob, I think you'd like to jump in on this as well.

Yeah, I think overall, we over the past few quarters here have also delivered some very nice NPIs, new products introduction here in the market, and we still have a very strong funnel. So as Mark is saying, and Mike is saying, when the market is coming back, we are absolutely in a very strong position to take our share of the

market.

And

it's interesting, too, as Bob noted in his call, the chemical energy business, which I had positioned earlier on is sort of the wild card for Agilent on the upside. We actually had really, really solid growth in Q2, and we're pretty optimistic about that for the rest of the year.

Thanks, L.F. And then secondly, would love to give an update on how some of the more recent acquired assets are performing relative to your deal models like ACA and AAT, which like the M&A contribution expected for the year kind of came down a bit. So we'd love to get an update on how some of those assets are performing.

Yeah, overall, I think that they continue to do ACAs early, but in fact, we just had a review on this yesterday afternoon. I mean, yesterday afternoon, and they delivered strong double digit growth. They had expectations. So all of that does not get in revenue. So ACA is tracking very nicely. AATI was still very pleased with the performance today. The growth rates are probably a little bit slower there, tied to if you look at the number of new instrument placements that Illumina had in the first quarter. So to some extent, that business growth rate is tied to the growth rate of the NovaSeq and some other parts of the portfolio in Illumina. We're expecting, I think, Sam, the back half is probably looking a little bit better for that as Illumina gets more of those instruments placed.

Yeah, that's absolutely right, Mike. And looking at overall, NGSQC, we're still tracking with the market, absolutely.

Yeah, and I think we also got a fair amount of time to PacBio, so that gets resolved. But you're close to the numbers, but overall, there's still double digit growth out of the companies we required. And I pointed to the cell analysis business overall as being a double digit grower for us in the quarter. Very good, thank you.

Our next question comes from the line of Jack Meehan with Barclays. Your line is now open.

Thanks. Good afternoon, everyone. Good afternoon, Jack. I wanted to follow up and was hoping you could just elaborate a little bit more, contrasting some of the weakness on the capital side versus the strength you're seeing at ACG. I guess just what's embedded in the outlook for cross labs through the end of the year and just the level of comfort that some of the slower replacement cycle on the instrument side that the recurring piece can hold up as you look out over next year.

Yeah, we're really confident about the outlook on the ACG business. And often we find that if you have slowing capital replacements, it actually is an upside to the service business in particular, where though often, you know, it's going to be extending the life of equipment. So Bob, I think we're pretty, this is an area of high confidence for us.

Yeah, I mean, and Jack, we're expecting, you know, the continued performance into the second half of the year like we had in the first half. And quite honestly, the way that we had in 18 as well, which is high single digit growth there, really behind both services as well as the consumables. We have, we aren't seeing, you know, testing volumes decline, whether that be in pharma or any of the other end markets, they're actually, you know, quite strong. And so we feel pretty good about that. Our forecast remains unchanged there.

Yeah. Great. And then just wanted to follow up on some of the comments related to the NASD business. You know, obviously, growth came a little better again in the quarter than we were expecting, but just the pacing of when the new line is going to open up and just, you know, that's a fourth quarter kind of step up you're expecting. Just confirm that. Thanks.

Yeah, sure, Jack. And in fact, we just had a review the very time they call. So we're expecting most likely the fourth quarter is where we start to see some initial revenue coming out of the new site. We're still in the final phases of validation. So we don't want to say we're done yet, but we're getting close and we have our first customers lined up for those initial batches out of our Frederick site. And we're planning an opening in mid-June. But that's just a ceremonial opening. We won't be yet producing a product, but we're forecasting inside the company the fourth quarter of this year. And I say that's some initial revenue then with the larger step up coming in 2020. I would also just compliment Sam and his team because we continue to find ways to get more revenue out of our existing boulder sites. I would also tell you that our full year revenue projects in NASD are well intact.

Yeah. And Jack, just to maybe build on that, I wouldn't build any incremental revenue in Q4 for your model because as we ramp up the facility, it's really going to be a material contribution in 2020.

Okay. Thank you both.

Our next question comes from the line of Punit Suda with SCD Laring. Your line is now open.

Yeah. Hi, Mike. Thanks. So maybe my first question is just wanted to clarify on USB regulation. I know USB has been helping you in the past in terms of ICP MSes. Was there a step down in that application as well across the pharma channel worldwide or was it just weak in China? And what's your outlook in that business aligned with ICP MS? And I mean, I'm asking this because it's levered to small molecules and your customers are using it for analyzing the small molecule coatings.

I'll make a few summary comments and I'll have Jacob jump in on this. But I believe we think that's actually been declining in the pharma space. But overall, we expect really good growth in our spectroscopy business. We look out with some of the other applications, you know, given the stronger PMIs in the US, some of the demand for product in other end markets outside of the USP. But Jacob, you're closer to the IM.

Yeah, absolutely right. That we saw a very nice opportunity last year in USP. But now it's kind of moved on both to water analysis, but also the STM business. And generally speaking, we see that the ICP MS growth, particularly in US, is very strong this year. So we actually see that there is plenty of opportunity with ICP MS. Obviously, when new regulations come in place, then there is a certain opportunity. But it looks like we're jumping for opportunity, opportunity in that space. And I think it will continue to grow.

And my second question is around, I appreciate that you're getting challenging quarter and Elsa. I care, but just help us understand that, I mean, you talked about the magnitude of benefit that you received in 88.90 and 88.60. I don't know if you quantified that in the quarter. And I'm asking that because in the last call you mentioned you started shipping that instrument, I think, in the second week of February. And I just wanted to get a sense of how that instrument is contributing and what's your expectation for the rest of the year.

Yeah, Puneet, thanks so much for asking about this because this is a real bright spot in the overall LSEG performance in Q2. And it kind of speaks to our view of the future. We didn't quantify and probably won't quantify the exact contribution, but we did start shipping. But I'd say right now we have more orders in backlog than we shipped. And I think we're 150, 200 percent of our forecast. That's pretty significant.

It has been very significant. Obviously, it is also some customers decided to move from the 78 into the 88 series faster than we anticipated. But at the same time, we're also seeing that with the 88.60 going for the midrange that that combination with the mass spec had actually been quite successful also. So overall, we see good momentum, but we haven't quantified the incremental.

Okay, got it. And last one, if I could squeeze in around sort of food again. Just wanted to understand, you know, again, is that business largely all LSE there or how much of the content? I mean, how do you look at that business in terms of the types of things that are there and how do you expect this improvement? Thank you.

Sure. Having answered that, Puneet, so when we think about the food safety marketplace in particular, which is where we focus our comments relative to China, it really is a permanent mass spec place. You're talking about GCMS, LCMS, ICPMS, and some standalone LCs. I think this is one of the reasons why we have done so well in this place historically is just the breadth of the portfolio we have across all those technology platforms. So it is broader than for Agilent, it is broader than LSE.

All right, great. Thank you.

Our next question comes from line at Katherine Schulte with Baird. Your line is now open.

Hey, thanks for the questions. Sure, Katherine. I'm just going to your guidance commentary. You said about two-thirds of the reductions from China. How much of that is four plus seven versus food?

Yeah, I would say about of that, roughly two-thirds of it is food, and about a third of it is four plus seven.

I think we did some rough math on the overall generic farmers, probably two-ish. Yeah,

overall when we think about China, the small molecule business in China is roughly two to three percent of the overall Agilent revenue, just to kind of frame in the size.

Okay, very helpful. And then on the four plus seven program, what's the incremental risk if that moves beyond the initial 11 pilot cities, and how long do you think it takes the market to work through these changes?

Yeah, I actually think the way we're thinking about that, Katherine, is actually because of while it's only in 11 cities, I think it's actually created a pause throughout the provinces to understand kind of what the impact is. So it's actually gotten greater. We think we're seeing that impact now as opposed to further impact down the road. I think actually what you'll see is once this is determined, it'll actually create clarity about what's going to happen throughout the course. And we think we've seen the impact broader than just those 11 cities. In

fact, that was the thinking behind the calculation we did.

Okay, and then just the last one. We saw US PMI drop below 53 in April, and Europe's been below 50 for a couple months now. It sounds like you're pretty optimistic on chemical energy outlook. So maybe talk about what you're expecting in the back half for chemical energy and the puts and takes there.

You want to take that one, Bob? Sure. You know, our chemical and energy business in the back half is, you know, we talked about when we gave initial guidance at the beginning of the year, kind of low single digits, and that's kind of what we're thinking about. We were positively surprised in Q2. You know, for reference, Q1 was roughly 2% through to 6% in Q2. We're assuming kind of low single digits in the back half of the year consistent with our early guide.

And I think on this, on the overall European outlook, we're

not expecting that

at the Q2 level.

Yeah, no, exactly. And for Europe as well, across the businesses, we're thinking low single digits again consistent with our, you know, our estimates at the beginning of the year. We were positively surprised in Q2, but we're expecting it to be consistent with what our initial expectations were.

Great. Thank you.

You're quite welcome.

Our next question comes from the line of Steve Willoughby with Cleveland Research. Your line is now open.

Hi, good evening, and thanks for taking my questions. Two things for you, Mike. I guess first, as it relates to the China food business, you know, have you thought at all, you know, is it possible that the softness continues, you know, for quite a while here, even though we've started anniversary, it is, you know, that volume moves to these more efficient commercial labs versus the previous government run labs? And then I just have one quick follow-up.

Yeah, sure. You know, what's happened also is the charter of what these organizations do has changed, right? So a lot of the volume activities has been to the contract special labs and these guys are now developing methods and the new regs. So we think they're going to require, ultimately, the next generation technologies, equipment, to stay on the leading edge of research and development of new applications. And that being said, we are not assuming any recovery in the second half of this year. So, you know, we've become much more cautious about the outlook for the food in the second half. I think that's fair?

Yeah, yeah, I mean, we, you know, to be honest, we've assumed recovery and it's taken a little longer than we expected, so we're going to temper our growth until we're wrong to the upside.

Okay, fair enough. And then just, Bob, just one quick follow-up for you, and I know you're not going to provide any 2020 guidance, but just give us some perspective on the new Frederick NASD site. You know, it sounds like, you know, minimal revenue here in fiscal 19. You know, where do we get in fiscal 20 as it relates to the kind of $100 million revenue potential capacity?

Yeah, yeah, Steve, you're correct. We're not going to give kind of a forward-looking. What I would say, though, is we're generally on track with what we said back in June of last year in terms of kind of the ramp-up and so forth. So, you know, how that ramps across the quarters and across the year is, you know, still, we haven't gone through our planning cycle, but what I will tell you is that, you know, we feel very good. We have a very robust funnel for products that are going into that site. We've already had some customers tour the site. Obviously, it's not operational yet because we're still doing the validation, as Mike talked about, but, you know, it's moving along as we expected.

Okay, thank you.

Our next question comes from the line of Dan Brennan with UBS. Your line is now open.

Great, thanks for taking the questions here. So I wanted to ask a question, maybe back to Jacob. I was hoping you could provide a little bit more color about what you're hearing from customers on the pharma side in the US and Europe to account for the more restrictive budgets and if it's related to anything with global macro, you know, maybe from Mike, have you seen any such impact to other businesses as well?

Yeah, actually, why don't I start off, Dan, and thanks for the question, and I'll pass it down over to Jacob for specifics on pharma. We haven't seen that in the other segments of the marketplace, and there's a lot of noise out there, so uncertainty is never good, but we really can't point to anything specific, and I think if you look at our results, I mean, you saw two or three businesses continue to perform as expected and do quite well, and then we had some isolated but obviously impactful slowdowns in aspects of the LSAG business, albeit, you know, the chemical energy, academic government, you know, environmental forensics, and biopharma were continued sources of strength, so I think it's really been isolated to the factors you mentioned, and, you know, I know, Jacob, you've been trying to do a little bit more diligence around this, and we have some theories, but I'm not sure we have, you know, a 100% specific answer what's driving the customers to delay the purchases on the small molecule side.

No, clearly, we are seeing that conservative procurement tactics that they are using, and obviously, we've been out doing our own digging to understand what's really going on there, and first of all, we don't see any change in competitive dynamics. This is truly a market situation we're in right now, so this is where people, the procurement organizations and the customers in general are just more cautious in their decision on capital equipment expenditure right now.

Yes, I think it's just more speculation on our part, but we, you know, some of the things were, hey, there's still some question about where prices are going to land in certain parts of the world in terms of unused prices, some questions about growth, and

then again,

as we mentioned earlier in the call, prioritization, when push comes to shove, prioritization of biofarm over small molecule, but again, we just think it's a push-out delay, business has not been canceled.

Great, thanks Mike, and then maybe related to a question I know there was asked earlier just for clarification, so I think you gave us what farm has baked in for Q3, can you just let us know what kind of assume for farm and food flow of Q3 and Q4, and just remind us how big is your China food business?

Yeah, so on the guidance, Dan, this is Bob, you know, we're assuming, as I mentioned before, for farm a kind of -single-digit growth for the full year, and that's consistent with where we are for Q3 as well on a global basis, so better than the 2% that we had in Q2. In food, you know, we're expecting for Q3 probably a slight decline as well. Hopefully, as I mentioned, hopefully that proves to be conservative, but we're assuming that overall for the full year, food will be flat to slightly down.

And I think historically Bob, it's run about -18% of our China business has been in food, obviously with a decline is probably close to that 15 number.

Great, and if I can ask one more, that seems to be the trend here, just on cap deployment, obviously more towards the buyback than Q3, but kind of how are you thinking about M&A? Obviously you have a lot of balancing optionality, just wondering what the pipeline looks at and kind of how we think about it over the next six to 12 months. Thanks.

Sure, Dan, thanks for that question. In fact, the pipeline looks very robust, and as I signaled, I believe, in the last call, we're very active right now, and I don't have anything to announce, but we want to deploy the capital, we want to leverage the strength we have on the balance sheet. Bob is very explicit on how we're going to use one aspect relative to the buyback side, but we have plenty of firepower to execute on targets. And as you can see, based on my earlier comments and some of the numbers we're putting up with the companies we have acquired, we're increasingly confident in our ability to deliver on SOVs if you will, for our shareholders, when we deploy that capital.

Sources of value.

Oh, sorry. Thanks, Bob. Perfect, thanks, guys. Thank you, Dan.

And that concludes today's question and answer session. I'd like to turn the call back to Mr. Dinger for closing remarks.

So with that, we'll close today's earnings call. Thanks a lot for joining.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.